India’s data centre industry is entering a period of rapid expansion, fuelled by digitisation, data localisation, 5G, streaming, online gaming and digital commerce. Capacity is expected to rise sharply from around 0.9 GW in 2023 to nearly 2 GW by 2026, creating a major opportunity for technology companies, infrastructure providers and real estate investors.
But behind the growth story lies a more complicated question: what will it take to power, cool and physically accommodate this digital infrastructure?
The expansion of data centres is often presented as an inevitable requirement of a digital economy. Yet these facilities are among the most infrastructure-intensive forms of real estate. Their growth could put pressure on electricity, water, land and urban infrastructure, particularly in the cities already dominating India's data centre market.
The power problem
Electricity is the foundation of every data centre. Servers operate continuously, while cooling systems and backup infrastructure require additional power. As India's capacity moves towards 2 GW, the electricity requirement associated with the sector will become increasingly significant.
The challenge becomes more complicated because operators cannot simply depend on an occasional power supply. Data centres require highly reliable electricity and extensive backup systems. This makes their infrastructure demands substantially different from conventional commercial buildings.
The capital cost is already rising. The average cost of setting up a megawatt of data centre capacity has increased from around ₹40-45 crore to ₹60-70 crore. Part of this reflects the increasingly sophisticated infrastructure required to maintain uninterrupted operations.
The industry's expansion therefore creates a parallel challenge for cities and utilities: how much additional power infrastructure will have to be created to support the digital economy?
Water could become another pressure point
Power is not the only resource involved. Data centres generate enormous amounts of heat and need sophisticated cooling systems to maintain operating temperatures.
This raises an important concern for water-stressed cities. India's major data centre hubs include Mumbai, Chennai, Noida, Gurugram, Bengaluru and Hyderabad, several of which already face significant pressure on water and other urban infrastructure.
As capacity expands, the location of a data centre cannot be assessed only on land availability and connectivity. Water availability and the environmental impact of cooling systems will become increasingly important considerations.
The industry’s growth could therefore create a difficult trade-off: digital infrastructure may be essential for economic growth, but the physical infrastructure supporting it could compete with other urban needs.
Land is another hidden cost
Data centres require specialised buildings and large sites, particularly when operators plan for future expansion. With more than 60% of India's data centres concentrated in six cities, the pressure on established markets could intensify.
Mumbai illustrates the issue particularly clearly. JLL had projected the city would account for 57% of new data centre supply in a particular expansion cycle, with Chennai accounting for another 25%.
Such concentration creates efficiency advantages because these cities already have strong connectivity and enterprise ecosystems. But it also raises questions about land costs, congestion and competing uses of urban land.
A city already struggling to accommodate housing, offices, roads and public infrastructure may have to make difficult choices about allocating scarce land to facilities that employ relatively few people compared with conventional commercial developments.
The concentration risk
The industry's geographical concentration also creates vulnerability. When a large share of data centre capacity is located in a small number of cities, disruptions caused by extreme weather, power shortages, flooding, connectivity failures or other infrastructure problems can have wider consequences.
Mumbai and Chennai's importance is particularly linked to submarine cable connectivity. This is a major competitive advantage, but it also means that the digital infrastructure ecosystem is increasingly tied to a limited number of critical physical gateways.
The move towards edge data centres could eventually reduce some of this concentration by distributing capacity across Tier-II and Tier-III cities. But decentralisation will require reliable electricity, fibre networks, land and skilled manpower in those locations.
The environmental contradiction
There is also a larger contradiction at the heart of the data centre boom. India is rapidly digitising its economy while simultaneously trying to reduce the environmental cost of economic growth. Data centres support everything from digital payments and cloud computing to streaming and artificial intelligence, but their physical footprint is far from invisible.
More servers mean more electricity consumption. More electricity infrastructure means more investment in generation and transmission. More cooling means greater resource requirements. More facilities mean additional construction and land use.
The industry is therefore likely to face increasing pressure to demonstrate how efficiently it uses energy and water, rather than simply how quickly it can add capacity.
The real estate opportunity has a price
For developers and investors, the sector presents an attractive new real estate opportunity. Industry revenue grew at nearly 25% CAGR between FY17 and FY23, while CareEdge Ratings expects around 32% CAGR growth during FY24-26. Absorption also improved from 82% in 2019 to 93% in 2023.
These numbers point to strong demand. But they should not obscure the infrastructure burden behind that demand. Data centres are not ordinary commercial assets that can simply be added wherever land is available. They require dependable power, cooling, connectivity, security and increasingly resilient infrastructure.
India's data centre expansion is therefore likely to reshape the country's real estate market. The bigger question is whether cities can absorb that expansion without transferring its costs to already stretched public infrastructure.
India generates about 20% of global data but currently has only around 3% of global data centre capacity. Closing that gap represents a huge economic opportunity.
It also represents a resource challenge. The success of India's data centre story will ultimately depend not just on how many megawatts of capacity the country builds, but on how sustainably those megawatts can be powered, cooled and accommodated.
